These companies are trading near their 52-week lows but have strong underlying fundamentals that promise long-term growth potential.
Seriously undervalued
With shares trading at 0.43 times book value, Barclays (LSE: BARC) seems seriously undervalued. Although most analysts would argue that Barclays shares look like a value trap because the bank is a serial under-performer and remains largely unprofitable, the bank boasts two strong core franchises: its retail bank and credit card business.
Profits from these are chugging along nicely with returns on equity in the mid-double-digits and generating more than £4bn in pre-tax profits each year. Its investment bank will take longer to repair, but there are already signs of improvement. Profits doubled to £804m last year, and the post-Brexit boom in trading volumes could push this year’s performance higher still. This would only be a short term boost though, and Barclays has a lot further to go in tackling its high cost structure to restore profitability over the longer term.
City analysts expect the bank to report adjusted EPS of 12.2p this year, with 18.3p forecast for 2017. This means shares in Barclays are attractively-priced, with a forward P/E of 12.6, which is forecast to fall to just 8.7 by 2017.
Non-cyclical demand
Also experiencing a difficult period has been G4S (LSE: GFS). Shares in the global security firm have fallen 32% since the start of the year, following a series of high-profile scandals. This has caused a weakening in investor sentiment, with G4S under pressure to repair its credibility and restore public confidence.
Following an acquisition spree under former CEO Nick Buckles, G4S is undergoing a transformation to become a leaner operation with a focus on organic growth rather than acquisitions. Thanks to growing global security demand following recent terrorist attacks in Europe, the sector is doing well, with G4S winning new contracts worth £950m since the start of the year.
Looking ahead, G4S is set to benefit from the non-cyclical nature of demand for security as global economic growth slows. The company’s large foreign revenues also mean it’s well positioned to benefit from the weaker pound, as that boosts the sterling value of its earnings. City analysts expect full year adjusted EPS to grow 3% this year, with a further 9% pencilled-in for 2017.
Trading at a forward P/E of just 12.2 and offering a prospective dividend yield of 5.2%, value investors should keep an eye on G4S shares.
Highly cash-generative
Having slumped 23% since the start of the year, shares in Sky (LSE: SKY) are trading near its 52-week lows. The company may be facing increased competition from the likes of BT and Virgin Media, but it remains a dominant player in the pay-TV market and is highly cash generative.
Sky’s track record on dividend growth is impressive, with dividends enjoying an average compound annual growth rate (CAGR) of 11.1% over the past five years. Looking forward, city analysts expect adjusted earnings to rise 10% this year, with dividends expected to rise 3%.
At 876p, shares in Sky trade at an undemanding 14.1 times forecast earnings. Furthermore, Sky is a solid income option, with its dividend being covered 1.7 times by profit and it yielding 3.7%.
City brokers are bullish on the stock too: out of 22 recommendations, 11 are strong buys, six are holds, three are sells and two are strong sells.
